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EIGHTEENTH ANNUAL PACIFIC-RIM REAL ESTATE SOCIETY CONFERENCE

ADELAIDE, AUSTRALIA, 15-18 JANUARY 2012

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Annual PRRES Conference, Adelaide, Australia, 15-18 January 2012 1

CASE STUDIES OF THE EFFECTS OF SPECULATION ON REAL

ESTATE PRICE BUBBLE FORMING: BEIJING AND SHANGHAI

(2001~2010)

CHAI NING1, OH DONG HOON2

1Seoul National University

2The University of Seoul

ABSTRACT

From the angle of economic development, a certain degree of real estate bubble is beneficial to the overall real

estate market. However, if the bubble inflates too fast and even goes out of control, a serious economic crisis

will take place after the bubble deflates. The rare land, the expansion of real estate speculation and the excess

lending are conceived as the main reasons that bring about a real estate bubble. Real estate speculation will

bring treat to the sustainable, stable and balanced development of real estate market. This paper aims at

analysing the effects of speculation on real estate price bubble forming in Beijing and Shanghai real estate

market in accordance with the statistical data (2001~2010).By respectively examining the speculation levels

and bubble levels of the real estate markets in two cities, the study finds that the degree of real estate bubble in

Beijing is higher than that in Shanghai and the bubble has an overall expansion tendency; the speculation level

in Shanghai is higher than that in Beijing, but they are thought to be not serious, what’s more, Beijing has the

stronger effect of the speculation on housing bubble forming than that of Shanghai. At last, the study suggests

that the government should make efforts to curb the real estate speculation for a healthy and stable real estate

market.

Keywords: Real Estate Bubble; Speculation; Housing Price; Real Estate Market

INTRODUCTION

The real estate development is essential to the macroeconomic development of a country. A rapid real estate

development will enhance economic development; on the contrary, if the real estate development remains

stagnant, it will adversely affect the development of national economy. However, with the development of real

estate industry, some investors have found the appreciation potential, resulting in the large capital inflows in real

estate market; housing prices continuously rise out of market, causing a real estate bubble forming. From the

angle of economic development, a certain degree of bubble existing in real estate market is likely to promote the

development of national economy, but if the bubble inflates too fast and even goes out of control, a serious

economic crisis will take place after it deflates. Some cases can show the serious effects of real estate bubble on

economy, for instance, the Japanese real estate bubble (1990s), the real estate bubble of Hainan, China (1992~

1993), the Asia economic crisis (1997), and the American subprime mortgage crisis (2008). The most famous

case is the Japanese real estate bubble. When the bubble burst in 1990, bad debts brought the banking system

close to collapse, and Japan, therefore, fell into a decade of recession and deflation, which sounds the alarm to

many countries around the world.

With the progress of urbanization accelerated, Chinese real estate is developing fast, and the housing prices are

trending upwards, thus many investors have the expectancy that the housing prices of big or medium-sized cities

will be growing. Prompted by benefits, they invest on a large amount of capital in housing market, which adds

instable factors to housing prices. Many scholars give their opinions to estimate whether the development of

Chinese real estate is healthy or not, raising a fierce contention about real estate bubbles. Generally, a real estate

bubble is a kind of economic bubble occurring periodically in real estate markets. It is a process of continual

price rising detached from real value and the excess of sales over the moderate price dictated by market.

Entering into the 21th century, the real estate in mainland China is developing quickly, the commodity housing

prices in a few big cities like Shanghai and Beijing are to approach the level of the developed countries, which

has caused a worldwide concern.

The researches on bubble in western field of economy focused on stock market in theoretical analysis and

comparative study rather real estate price bubble. Kindleberger (1989)［1］

argues that inside investors raise the

assets prices through property speculation and sell them at higher prices to outside investors; the outside



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investors buy the assets at high price and have to sell them at low price. In the period of economic expansion,

speculators usually have “naive expectation”— the prosperity will be ongoing indefinitely, so the initial

speculators may sell their assets to those who have the risk preference, and then they benefit from it. Obviously,

the formation of real estate bubble is closely linked with speculations.

Especially in recent years, China’s real estate prices and investment have been raised rapidly, some

professionals start debating about whether the speculations are serious and whether the developments of real

estate market overheat or not. In 2008, the economic crisis happened in the United States was throughout the

world, and it brought about serious effects on China’s real estate. If an excess bubble exists in China’s real

estate market, the economic development will be affected seriously with the housing bubble popped. Facing this

fact, the paper chooses two first-tier cities, Beijing and Shanghai, as research objects, uses the statistics data

from 2001 to 2010, respectively measures the speculation degree and the bubble degree of the real estate

markets of two cities based on index method and modelling method, and analyses the relevance of housing

speculation and housing bubble in two cities so as to give a policy recommendation of the inhibition of the

housing bubble. This paper is divided into four parts. The next part is the review of research advances which

mainly summarizes scholars’ researches; the third section respectively measures bubble degree and speculation

degree of real estate market in Beijing and Shanghai by using index method and modelling method, and makes a

empirical study on the relevance of speculation and bubble forming of real estate market in two cities; the last

section gives some policy suggestions according to analytical results.

ADVANCES OF THE STDUY ON REAL ESTATE BUBBLE

The studies on the measurement of housing bubble have been progressing fast in recent 30 years, which can

generate progress in theory, methodology and application. This section makes the induction and analysis of the

present researches by reviewing domestic and foreign achievements, giving theoretical support to this paper.

The study on real estate bubble, either in methodology or in overall frame, borrows the research methods and

concepts of financial asset bubble. Before the 1980s, economists around the world mainly made the qualitative

description and analysis of asset bubbles［2］.

However, the systemic research on bubble phenomenon was started

with studying on “rational bubble” in the early 1980s ［3］

.Internationally, the study is generally aimed more at

stock markets than housing markets. Since 1990s, affected by the Japanese estate bubble, the Asia financial

crises and the American subprime mortgage crisis, the researches of real estate bubble have received a wide

publicity and made great advances. For now, the studies on the existence, the determination method of bubble

and the influencing factors of real estate bubbles are three main contents.

The research on the existence of real estate bubbles began relatively early in abroad. Naguchi Yokio (1987)

measured the existence of housing bubbles ［4］

; Kim and Suh (1993) found that the housing prices of Japan and

Korea skewed off from a long period of balanced standard［5］

; Bertrand (1999) examined the housing bubbles

at the level of the twenty districts of Paris from 1984 to 1993 in order to get insight into the spatial mechanism

of speculative bubbles ［6］

; Abraham and Hendershott (1996) ［7］

, Case and Shiller (2003) ［8］

and Allen and

Thomas (2008) ［9］

researched on the measurement of speculation bubbles in American real estate market; Kim

(2004) ［10］

also measures the Korean housing bubbles.

For the determination method of bubble, Naguchi Yokio (1987) propounded a method of measuring bubbles by

discounted cash flow analysis; Wong (2001) ［11］

created a dynamic model based on Thailand housing bubbles,

showing the motive mechanism of “group action” caused by the optimistic expectancy of land agents and

residents in the process of the bubble production and expansion; Chan, Lee and Woo (2001) ［12］

measured the

rational bubbles of Hong Kong housing market by econometrics model; Shimizu and Kiyohiko (2007) ［13］

analysed the indices of Japanese urban land prices to measure housing bubbles and found the significant

structural changes in price structure, indentifying pre-bubble, bubble and post-bubble periods.

About the influencing factors of real estate bubbles, Kazuo Sato (1995) ［14］

studied on the supply-demand

relation of Japanese housing market and points out that housing bubble is caused by the expectancy of price

growth; Edward (2008) ［15］

argued that housing bubble was easy to form in the housing market which had

small price elasticity of supply; Lee and Ong (2005) ［16］

found that housing demand and the positive feedback

mechanism of housing price caused the real estate bubble; Macro-economically, Krugman (1999) ［17］

stated that

the common ground of all housing bubbles was that the investing funds are accommodated by banks; Allen and



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Gale(1998) ［18］

illustrated that the problems of financial intermediary agencies resulted in forming the asset

bubbles; asset prices were related to credit quota, and the uncertainty of the return on assets causes asset

bubbles; Gerlach and Peng (2005) ［19］

studied on the relationship between residential property prices and bank

lending in Hong Kong; Leung (2004)［20］

provided a selective survey of the small but nascent research efforts

focused upon interplay between the housing market and macro-economy.

The researches on real estate price bubbles in China began after housing reform in the late 1990s, Zhou (2004)

［21］argued that speculation would cause economic fluctuation and propel the asset bubble forming; Wu and

Wang (2006) ［22］

stated that the most direct reason for real estate bubble was the over speculation and build a

measuring model of speculation bubble; Xiao (2010) ［23］

analysed the degree of real estate speculation in the

case of Shanghai real estate market, giving some suggestions about controlling housing prices.

This paper also refers to two similar researches. Lai, Xu and Jia (2009) ［24］

established a regression model of

real estate price with economic variables and built the econometric model to measure real estate’s speculative

bubble of Chongqing city; Hou (2010) ［25］

examined whether housing price bubbles existed in Beijing and

Shanghai and showed that Beijing appeared to have been on the way of forming a housing price bubble between

2005 and 2008, and found that a housing bubble perhaps existed in Shanghai from 2003 to 2004, besides,

Beijing housing market was divided into 3 stages due to bubble forming: cycle peak stage (1991-1997) , cycle

trough stage (1998-2003) and the second cycle peak stage (2004-2008).

The research topics of the above two papers are similar to this study. However, by contrast, this paper makes

combination of the study on real estate speculation and real estate bubble and mainly researches the effects of

speculation on the real estate bubble forming by respectively measuring the speculating and bubble levels of

Beijing and Shanghai. Then, this study not only examines the speculative level of Beijing and Shanghai but also

respectively examines the increased portion of housing price caused by speculation and the proportion of

“speculative price” in annual average housing price of Beijing and Shanghai so as to make the study accurate. In

addition, in the process of measuring real estate bubbles of two cities, the study chooses five indices instead of

modelling method in order to directly illustrate existing problems, meanwhile, by reviewing the change situation

of indices around the safety value, the study also measures both the annual average “bubble level” of and the 10-

year average “bubble level” of Beijing and Shanghai.

MEASUREMENT OF REAL ESTATE BUBBLE AND SPECULATION LEVEL

There are generally two methods to measure the degree of real estate bubbles, index method and modelling

method. Index method is to judge whether the real estate bubbles exist in housing markets or not by analysing

different indices. This method is relatively easy and can directly illustrate problems. Modelling method has

essential measuring and evaluating system through modelling based on theory. According to practical

circumstance, the study is to observe the annual real estate bubble levels of Beijing and Shanghai from 2001 to

2010 by examining the change of indices around the safety line, therefore, the study choose index analysis

method to measure the real estate bubble level of Beijing and Shanghai from 2001 to 2010. Additionally, the

study will also calculate the proportions of the increased prices caused by speculation in the annual housing

prices while measuring real estate speculation level of Beijing and Shanghai from 2001 to 2010.

Measurement of Real Estate Bubbles

According to Ren and Wang (2008)［26］

, the indices “housing price-to-income ratio”, “housing price growth

rate-to-GDP growth rate ratio”, “real estate investment growth rate-to- GDP growth rate ratio”, “total

investment in real estate-to-investment in fixed assets ratio” and “construction area-to-completed area” ratio can

well reflect the real estate bubble level. Thus, the study will analyse the five indices respectively basing on the

real situation of Beijing and Shanghai real estate market from 2001 to 2010, measuring the changing situation of

housing bubble and the 10-year average bubble level by examining the change of index values around the safety

line. Through this way, the study will know the operation situation of the real estate economy in Beijing and

Shanghai during the last decade.



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Housing Price-to-Income Ratio

The index “housing price-to-income ratio” can show family payment capacity. Higher housing price-to-income

ratio means lower payable capacity. When the ratio increases continuously, the level of the needs of speculation

in housing market become higher, causing a possibility of housing bubble forming. Internationally, the safety

value of housing price-to-income ratio in developing countries is “7”. According to the characteristic housing

system and the “invisible income” in China, it should be much bigger than “7”. Academically, the safety value

of the index in China is “8”. Fig.1 shows the housing price-to-income ratio of Beijing and Shanghai from 2001

to 2010. Obviously, the changing curve of Beijing is above the safety line; the ratio value increases from 2006

and reach the peak in 2010. The housing price-to-income ratio value of Shanghai is above the safety line from

2003 to 2010 and reaches the peak also in 2010. Especially, the ratio has a rapid increase in both Beijing and

Shanghai from 2008 due to U.S. financial crises. It is found that the payment capacities of the families in two

cities are relatively weak, moreover, the housing price is not rational and the housing bubble exists in markets.

Source: Beijing Statistics Yearbook(2011); Shanghai Statistics Yearbook(2011) (arranged by the study)

Fig.1. Housing price-to-income Ratio of Beijing and Shanghai.

Housing Price Growth Rate-to-GDP Growth Rate Ratio

This index mainly shows the expansion level of housing bubble and can be usually used to examine the bubble

level. Internationally, the safety value of the index has no strict standard. Generally, when the housing price

increases 2 times more than the GDP growth rate, the housing price seems to be not reasonable due to the

existence of housing bubble. As shown in Fig. 2, Beijing and Shanghai have basically kept a healthy economy

development. In 2006 and 2007, however, the ratio value of Beijing beyond the safety line, and its GDP had a

great growth because of the 2008 Beijing Olympic Games, which makes the ratio value decreases under the

safety line greatly in 2008 but increases again from 2009.The ratio value of Shanghai beyond the safety line

only in 2008.


Fig.2. Housing Price Growth Rate-to-GDP Growth Rate Ratio



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Real Estate Investment Growth Rate-to-GDP Growth Rate Ratio

Real estate investment is able to reflect the supply-demand relationship of housing market. If the investment

increases rapidly, the demands of housing speculation will be also increased. Thus, it is the basic index that

examines whether the investment structure in various fields of national economy is rational or not and whether

the expansion of housing investment exceeds the rational standard or not. Generally, only if the ratio value is

less than 2, the real estate investment growth rate is in a healthy situation. As shown in fig.3, from 2001 to 2010,

the real estate investment growth of Beijing and Shanghai is generally in a normal condition.


Fig.3. Real Estate Investment Growth Rate-to-GDP Growth Rate Ratio

Total Investment in Real Estate-to-Investment in Fixed Assets Ratio

This ratio shows how much cash flow in the real estate industry. In developed countries, the index is usually

between 0.2 and 0.25. As China is a developing country which is in a rapid development and urbanization

process, the demands to real estate investment are larger than other countries. Academically, we choose 0.3 as

the safety value of this index. From fig.4, it is obvious that the real estate investment of both Beijing and

Shanghai accounts for a higher proportion in fixed assets investment, especially, the real estate investment in

Beijing accounts for more than 50% of the fixed assets investment.


Fig.4. Total Investment in Real Estate-to-Investment in Fixed Assets Ratio

Construction Area-to-Completed Area Ratio

This index is used to reflect the investment level and the supply-demand situation in future housing market. The

construction area is generally 3.5 times more than the completed area, which show the housing supply in the

next 1 or 2 years. The higher the ratio is, the more serious the bubble is. Fig.5 shows that the housing supply of



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Beijing and Shanghai is generally in a rational standard during 2001 and 2007, whereas, the housing supply has

become obviously increase from 2007, which may cause a housing bubble forming.


Fig.5. Construction Area-to-Completed Area Ratio

In order to measure the housing bubble level of Beijing and Shanghai, this study analyses the 5 key indices and

utilizes the extend that the 5 indices of two cities flow above or below the safety value to examine the housing

bubble level of Beijing and Shanghai from 2001 to 2010. The calculation formula is as follows.

(1)

Where

Bi: Bubble level at year i

Vij: Value of index j at year i

Sj: Safety value of index j

i: 2001, 2002,…, 2010

j: Index1, index2,…, index5

The bubble levels of Beijing and Shanghai from 2001 to 2010 are calculated and shown in fig.6. It is found that

the different housing bubble level exist in Beijing and Shanghai in the last 10 years. Beijing housing market has

relatively serious bubble level in 2001, 2007, 2009 and 2010, and the bubble level values are respectively 4.45,

5.65, 6.53 and 10.98; Shanghai housing market has the relatively serious bubble level in 2009 and 2010, which

are relatively 5.99 and 9.63. The housing bubble levels of both two cities reach the highest value in 2010, which

shows a dangerous situation in the housing market of Beijing and Shanghai.


Fig.6. Level of the Real Estate Bubble of Beijing and Shanghai (2001~2010)



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To compare the 10-year average bubble levels of Beijing and Shanghai, the study use formula (2) to explain the

10-year average bubble level.

(2)

Where

10-year average bubble level

Bi: Bubble level at year i

By calculation, the 10-year average bubble levels of Beijing and Shanghai are respectively 3.14 and 0.99, which

shows that Beijing has a more serious bubble level than Shanghai in the last 10 years. There are many reasons

for causing a housing bubble. The study mainly explores the correlation of housing speculation and bubble

forming. Thus we will study on the housing speculation level in next section.

Measurement of Real Estate Speculation

According to Muellbauer and Murphy(1997)［27］

, housing investors benefit mainly from two aspects. First,

house owners benefit from property use, which is based on “zero capital yield”; the second aspect is the increase

and decrease of capital gains caused by the house owner’s expectation for price change.

The formula is:

Where

Pt: housing price in “t” period

Pm

t: housing price of “0” capital yield

Ht: income from property use

“Ht” is found to be relevant to “y” (income) and “I” (short-term interest rate); “Ht” symbolizes the present

value of the expected capital yield.

Then

Ht= H*t+1/ (1+it) (4)

Where

H*t+1: expected capital profits in the “t+1” phase

it: interest rate in the “t” phase

(3) and (4) shows that housing price is composed with the housing use value and the present value of the yield in

lag phase. According to the positive feedback mechanism, H*

t+1 is likely to be relevant to the yield in the

previous phase, namely, it is affected by “gt-1” (price growth rate in the previous phase).

By research, Zhou(2004) ［28］

summarizes:

Pt =a0+a1Yt+a2It+a3 [(gt-1)/ (1+it)] t + µt (5)

Where

Pt=Pm

t+Ht (3)

a0+a1Yt+a2It : basic value of housing

a3 [(gt-1)/ (1+it)]t: increased portion of housing price by speculation



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By calculation, it is found that the degree of real estate speculation is: θ=-a3/a2. The larger the θ value is, the

higher the speculation degree is, and the larger the probability of bubble forms. International experience shows

that the safety value of θ is 0.4, in other words, if the degree of speculation exceeds 0.4, the real estate bubbles

exist in housing market seem to be extremely sensible.

In order to examine the speculation degree of Beijing and Shanghai, the study collects relevant statistics data

from 2001 to 2010 as shown in Table1. In empirical analysis, the dependent variable is P: average annual

housing prices; the independent variables are respectively Y: Per-capita disposable income, I: lending rate, and

(gt-1)/ (1+it): housing price growth rate.

Table.1 Relevant Data Used in the Measurement of Speculation Degree

Year (P)Average annual housing

price (Yuan/m2)

(Y)Per-capita

disposable

income(PCDI) (Yuan)

(I)Lending rate (gt-1/1+it)Housing

price growth rate

Beijing Shanghai Beijing Shanghai Beijing Shanghai Beijing Shanghai

2001 4716 3659 11578 12883 0.0585 0.0349 0.1001

2002 4467 4007 12463 13250 0.0531 -0.0528 0.0951

2003 4456 4989 13883 14867 0.0531 -0.0025 0.2451

2004 4747 6385 15638 16683 0.0558 0.0653 0.2798

2005 5853 6698 17653 18645 0.0558 0.2330 0.0490

2006 8276 8237 19978 20668 0.0572 0.4140 0.2298

2007 14420 10292 21989 23623 0.0693 0.7424 0.2495

2008 13222 14099 24725 26675 0.0634 -0.0831 0.3699

2009 15051 15404 26738 28838 0.0531 0.1383 0.0926

2010 22310 19168 29073 31838 0.0569 0.4823 0.2444

Source: Beijing Statistics Yearbook (2011); Shanghai Statistics Yearbook (2011) (arranged by the study)

By linear regression analysis, the results are shown as (6) and (7)

The speculation degree of Beijing real estate market is： θ1=-a3/a2=-2788.153/53463.422=-0.052, as θ1<θ (0.4),

the degree of speculation is less visible. In the above regression equation, t statistics is relatively large, so the

dependent variables pass the significance testing; F statistics is 18.218, so the equation is possible; R2=0.901,

and then goodness of model fitting is high.

The speculation degree of Shanghai real estate market is： θ2=-a3/a2= -2927.937/ (-94325.85)= 0.031, as

θ2<θ(0.4), the degree of speculation is less visible. The t statistics is relatively large; F=123.376; R2=0.984, thus

it can be said that the dependent variables have passed the significance testing, and the equation is possible.

Apparently, the speculation degree in Shanghai is more serious than that in Beijing, but both of them are not

above the warning value (0.4). So it can be concluded that there are not high 10-year average degree of real

estate speculation in both Beijing and Shanghai from 2001to 2010.

However, this indicator can only reflect the 10-year average peculation degree. In order to understand the degree

of housing speculation every year accurately, the study will examine the increased parts of annual average

housing price caused by speculation based on formula (5). The increased prices of the “speculation part” can be

Pt: housing price in t phase

Yt : per-capita disposable income

It: lending rate

(Beijing) P1=-10837.858+0.875Y1+53463.422I1+2788.153(gt-1)/ (1+it)1 + 10433.144 (6)

(0.871) (0.045) (0.122)

(Shanghai) P2=-2216.041+0.787Y2-94325.85I2+2927.937(gt-1)/ (1+it)2 + 3262.915 (7)

(0.996) (-0.92) (0.57)



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defined as “a3 (gt-1)/ (1+it)”. Therefore, the housing prices of the speculation parts of Beijing and Shanghai real

estate markets are respectively:

By arranging statistics data, the situation of the housing prices increase caused by speculation is shown in Fig.7.

In the situation of Beijing, it is found that the increased housing prices caused by speculation are minus value in

2002, 2003, and 2008; from 2000 to 2003, there is nearly no speculation that causes a increase of housing price

in Beijing real estate market; from 2004 to 2007, whereas, the speculation gets to the top, which makes average

housing price increase by 2069.92 (Yuan). In 2008, the speculation declines affected by the sub-prime crisis in

the United States, many investors withdraw funds from real estate market to mitigate investing risks. However,

good times do not last long, the “housing bubble price” increase again from 2009. From Shanghai’s situation,

some “bubble prices” exist from 2001 to 2010. The “bubble price” in 2008 is higher than that of Beijing

probably because of the differences of investing expectation of investors.

Source:Beijing Statistics Yearbook (2010); Shanghai Statistics Yearbook (2010)(rearranged by the study)

Fig.7. the Changing Situation of the Increased Housing Price Caused by Speculation (Yuan/m2)

Additionally, the study also calculates the bubble price-to-housing price ratio so as to test the proportion of the

bubble price caused by the speculation in total housing price. The test results are shown in Fig. 8. The bubble

price-to-housing price ratio in Beijing reaches the highest value in 2007 and 14.4% of the housing price is

caused by speculation. In 2002 and 2008, the lack of investment funds has led to the speculation atrophy in

Beijing real estate market. Whereas, the proportion of bubble price in housing price begins to increase from

2009. In contrast, the indicators of Shanghai have been in a relatively high level, and the highest value is 14.4%

in 2003 and the lowest value is 2.1% in 2005. Overall, the price bubble caused by speculation in Beijing and

Shanghai account for respectively 5% and 7% of 10-year average housing prices.

By correlation analysis, it is found that the analysis results are not statistically significant. Therefore, in order to

further explore the effects of the speculation on housing bubble forming in Beijing and Shanghai, the study

integrate related data into the curve comparison chart as shown in Fig. 9. From this figure, it is obvious that the

curve Fig.9 (a) has relatively more similar changing trend than Fig.9 (b), thus it can be concluded that Beijing

has the stronger effect of the speculation on housing bubble forming than that of Shanghai.

Sp1=2788.153(gt-1)/ (1+it) (8)

Sp2=2927.937(gt-1)/ (1+it) (9)



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Fig.8. Speculation price-to-Housing Price Ratio

(a) Beijing (b) Shanghai

Fig.9. Comparison Chart of Speculation Degree and Bubble Level

CONCLUSIONS

This study respectively measured the degrees of real estate speculation and the degrees of real estate bubble in

Beijing and Shanghai by index analysis and modelling method in order to analyse the effects of speculation on

real estate bubble forming from 2001 to 2010, and the study found the following results.

Firstly, the 10-year average bubble degree of Beijing and Shanghai are respectively B1=3.14, B2=0.99, which

shows that the degree of real estate bubble in Beijing is higher than that in Shanghai. Individually, Beijing has

relatively serious bubble level respectively in 2001(4.45), 2007(5.65), 2009(6.53) and 2010(10.98); Shanghai

housing market has the relatively serious bubble level in 2009 (5.99) and 2010 (9.63), showing an overall

expansion tendency of real estate bubble and a dangerous situation in the real estate market of Beijing and

Shanghai.

Secondly, the degree of real estate speculation in Beijing and Shanghai from 2001 to 2010 are respectively θ1=-

0.052, θ2=0.031, the degree of real estate speculation in Shanghai is higher than that in Beijing, but they are

thought to be not serious compared with the safety value 0.4. The bubble price-to-housing price ratio in Beijing

reaches the highest value in 2007, which shows that 14.4% of the housing price is caused by speculation; the

lack of investment funds has led to the speculation atrophy in Beijing real estate market in 2002 and 2008. The

bubble price-to-housing price ratios in Shanghai have been in a relatively high level, and the highest value is

14.4% in 2003 and the lowest value is 2.1% in 2005; the bubble price caused by speculation in Beijing and

Shanghai account for respectively 5% and 7% of annual average housing prices, which is basically consistent

with the degree of real estate speculation in two cities.



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Lastly, it is found that speculation is the important reason that causes a real estate bubble forming. Yet, the

study has not found the regularity of correlation between speculation and bubble forming due to the insufficient

data. However, by integrating related data into the curve comparison chart, the study found that Beijing has the

stronger effect of the speculation on housing bubble forming than that of Shanghai.

In conclusion, Beijing and Shanghai are the first-tier developed cities in Mainland China. In the past decade, the

real estate bubble is gradually formed while the real estate is rapidly developing, which makes their residents

have increasingly heavier burden on home purchase. The speculation in real estate market is the main reason for

high housing price, which can also play a role in the real estate bubble forming. Therefore, the study suggests

that the government should make efforts to curb the real estate speculation through effective macro-control,

property taxation, housing purchase limitation policy, and making housing assurance policy to make the

equilibrium of supply and demand in real estate market, then the real estate bubble will not spread and return to

a rational scope, and the urban economy will also have a healthy and stable development.

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